How stiff is EU’s resolve?

By Mike Peacock
March 20, 2014

Russian troops seized two Ukrainian naval bases, including a headquarters in Sevastopol where they raised their flag. Moscow, continuing to insist it does not control the unbadged militia in Crimea, called for a detained Ukrainian navy commander to be freed, which has now happened. Make of that what you will.

Washington is keeping up the rhetorical pressure. Vice President Joe Biden, in Lithuania, said Russia was travelling a “dark path” to political and economic isolation. U.N. Secretary-General Ban Ki-moon is travelling to Moscow for talks with President Vladimir Putin, Foreign Minister Sergei Lavrov and other senior officials. He will move on to Kiev on Friday. 

More potent may be an EU leaders’ summit today and Friday. After subjecting 21 Russians and Crimeans to travel bans and asset freezes, tougher sanctions are already under consideration and minds have also been focused on ending decades of dependence on Russian gas. It’s a long-term project but one that could deal a hammer blow to the Russian economy if it succeeds.

Russian lawmakers scoffed at the paucity of western action. Washington and the EU says tougher measures could follow but to hit where it really hurts – with financial and trade sanctions – looks difficult for Europe with so many vested interests and links with Russia from the bloc’s biggest members to its smallest.

It’s not clear that the EU’s March 6 statement that it would consider financial sanctions if there were “any further steps by the Russian Federation to destabilise the situation in Ukraine” will be pursued soon.

Germany’s Angela Merkel will speak to the Bundestag this morning, ahead of the summit, and Finland’s Europe minister Alexander Stubb is on the wire saying he did not believe EU leaders would decide on stricter financial measures this week.

What might happen is that more names are added to the existing sanctions list, including figures close to Vladimir Putin. EU officials say they have identified more than 100 potential targets.

And if Russia did move into eastern Ukraine then western Europe would have to stiffen its resolve or look impotent. To that end, background work will be undertaken on identifying the right targets for financial and trade sanctions and getting all the legal ducks in a row in case action is agreed down the road.

In the longer-term, if the EU slowly weaned itself off Russian energy, Moscow would have a massive income gap to fill. EU officials say the summit will look at how far “indigenous supplies”, which include renewable energy and shale gas, could be ramped up.

Debate is also under way, ahead of a visit by President Barack Obama to Brussels next week, on how much U.S. gas could be shipped to Europe. For the shorter term, officials said Qatar could increase shipments.

On more prosaic matters, the leaders will also have to tussle with the final shape of banking union after finance ministers and the European Parliament failed to agree on how to build an agency to close failed banks and a fund for clean-up costs.

The European Central Bank’s position as banking regulator is now enshrined and EU countries have reduced their scope to meddle in decisions by the agency to shut a bank. But it needed to be more independent than that to win over the parliament.

There was also an unresolved argument about the clean-up fund which, as things stand, will be built up over 10 years from bank levies to pay for failing lenders and then be pooled. Critics say that leaves the bloc’s governments exposed for too long.

EU country envoys and parliamentarians worked through the night to try and craft a deal to present to their leaders.

The Swiss National Bank has a quarterly policy meeting. With investors again looking for safety there is no prospect of scrapping the Swiss franc cap which has held good since it was imposed in Sept. 2011. Of 20 economists polled by Reuters, all said the SNB would keep it through 2014, 11 expect it to end sometime in 2015, but nine predicted it could last even longer.

Bond auctions in Spain and France will see Madrid offer up to 5 billion euros of bonds due 2017, 2019 and 2028 while Paris will sell up to 8 billion euros of OATs and a further 1.5 billion of inflation-linked paper.

Peripheral euro zone debt has been snapped up this year but Janet Yellen’s perhaps inadvertent steer that U.S. interest rates could head higher in the first part of 2015 – earlier than investors had expected – has unnerved markets somewhat this morning.

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